Levi Strauss & Co. President and CEO Chip Bergh touched on corporate values in touting the denim company as being all about doing the “harder right” over the “easier wrong” in speaking before a crowd last week during the Axios BFD conference last week.
“It is one of the things that I try to talk about as the leader of the company that we need to be prepared to make the harder right decision over the easier wrong decision and be prepared to live with the consequences of that,” Bergh said. “It’s not always evident on the surface, but time catches up with people.”
The CEO was the conference’s one speaker hailing from the fashion industry and while the conversation opened with the softball subject of skinny jeans, it later turned to heavier matters.
When asked for an example of a “harder right decision” Levi’s has made, Bergh pointed to the company’s more recent decision to exit Russia following the country’s February 2022 invasion of Ukraine. Russia was a sizable and profitable business for Levi’s, Bergh said. It also employed a large number of employees and had to grapple with not only the decision to exit but how to treat the workforce in the country as it wound down the business.
“It’s not so much we made the decision to exit. It was how we exited,” Bergh said. “We fulfilled all of our lease obligations. We had about 800 employees. And when we had to exit all but a couple of those employees, we paid them all packages. We did it the right way. Those were our team members. I mean, those were members of our team, and it was hard. It was very, very emotional, but it was absolutely the right thing to do. We could not continue to do business in that country, and it was one of the highest profit margin businesses that we had.”
De-Risking the Supply Chain
Exiting Russia for many companies was one part of a much larger conversation that has come out of the Covid-related supply chain issues. The concept of “de-risking” materials sourcing and logistics to avoid the issues seen in 2020 through 2022 was another. The tumultuous past couple of years has led some to argue the start of a nearshoring trend in which manufacturing could return domestically or at least within the continent, in addition to diversifying sourcing of materials beyond just a handful of countries.
Levi’s sources a good chunk of its materials from Mexico and used to have factories in the U.S. before moving it overseas.
“We were one of the last ones to go actually, and it almost cost the company its life because we became so cost uncompetitive in the late 80s and early 90s. But we did eventually offshore all of our production,” Bergh said.
He went on to say the type of labor required to, for example, make a pair of jeans isn’t necessarily the type of jobs that should come back into the country.
“I actually don’t think those are the kind of jobs that should come back into the U.S.,” Bergh said. “I mean, we’re already almost at full employment anyway and to make a pair of jeans, we still make them pretty much the way Levi Strauss did himself. We don’t cut the fabric with a pair of scissors. It’s all computer-assisted cutting, but the sewing and everything is done very manually. And it’s a low skill, low-cost labor, and that’s not really the kind of labor I think we should be trying to bring onshore here in the U.S.; we should be moving up the value-added curve from a manufacturing and sourcing standpoint, but there are opportunities to continue to be moving more production closer to the region.”
International Trade
The U.S. accounts for about 45 percent of Levi’s global revenue, making a strong case for bringing that production closer to home to avoid the wait times associated with ocean shipping.
While Levi’s has diversified its sourcing network, Bergh made the point that many countries that have been diversified away from still have good suppliers for the apparel industry when asked what the rest of the world still gets wrong about places such as India, Southeast Asia and Australasia.
“There are a lot of good suppliers out there,” Bergh said. “I think there’s a perception that everybody’s corrupt in that part of the world, and that is not the case. We have a big, global supply chain, for example, and we have de-risked China to be very, very clear.”
The company has discussed this multiple times now on earnings calls with analysts. Today, sourcing from China for Levi’s is somewhere in the mid-single-digit percentage, compared to nearly 20 percent when Bergh first joined the business. Less than 1 percent of the product the company imports into the U.S. is coming from China in a move that began with the tariffs installed during the Trump administration on Chinese imports.
“That, fortunately, helped us through Covid because a lot of companies got very, very caught up with an overdependence,” Bergh said. “We’re a big, global company and we’ve got a big, global sourcing base, and we try to have a very diversified sourcing base so that we aren’t overly reliant anywhere.”
Bergh acknowledged that activity by companies is lending to a broader “de-coupling” that’s occurring when it comes to international trade.
“De-risking is resulting in some de-coupling,” Bergh said. “Thomas Friedman has written about this, too, that the more de-coupled we become and the less interdependency, there is a greater risk of something really consequential in terms of hostilities goes up. I’m not a foreign affairs expert, so I’m the wrong guy to ask about this, but I do think that when there are interconnections and there are interdependencies that it forces us to be open and to have dialogue and to work through issues. So, there’s some good that can come out of that.”
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